The UK State Pension is pitiful, and we are increasingly having to rely on company pensions, Self Invested Personal Pensions (SIPPs), Individual Savings Accounts (ISAs) and other investments instead.
Plenty of people are fine with company pensions being invested on their behalf, and turning into an annuity-based income once they reach retirement age. But with the relaxation of pension rules, it’s never been easier to get our pension cash away from those insidious annuity schemes — and into something we can control for ourselves and most likely enjoy a better performance.
Sure, you need to be someone who can exercise self-control and not blow the lot on flash living — but even then, my take is that it’s your money and it’s up to you to decide what to do with it.
With most modern pension schemes, which work on the value of your contributions, it’s simple to transfer out — and what you get is the current value of your contributions plus whatever growth the fund managers have achieved.
But older ‘defined benefit’ schemes are set to pay a pre-defined income at retirement, often based on your final salary rather than the proceeds from your actual contributions. In many cases, that’s significantly more cash, which is why such schemes are largely a thing of the past.
Too generous?
Transferring out of a defined benefits scheme typically involves jumping through more hoops, with the amount you can get depending on whatever the pension fund managers offer you. And as defined benefit pensions can be very expensive to run, their offers have been getting more and more generous.
In fact, the Pensions Regulator has gone so far as to brand many of the offers being made these days as too generous, and has even written to 14 pensions schemes to urge them to cut back on their generosity.
The director of policy at Royal London, Sir Steve Webb, has pointed out that pension funds are regularly offering lump sums of around 25 to 30 times the expected annual pension for transferring out — and some have even reached around 40 times.
So if you’re set to receive £10,000 per year in pension, you could easily be offered £250,000 to £300,000 to transfer out — and maybe even as much as £400,000.
Why would the regulator want to curb this generosity? Well, on an individual level, governments can’t drag themselves away from the nanny-state mentality and think they should be in control of our lives. But one valid concern is that funds should be careful not to deplete their assets too much to take care of pensioners who remain in their schemes.
Get it while you can?
So what should you do as an individual? Well, if you’re contemplating giving up a guaranteed income for the rest of your life in return for a lump sum now that you can invest, then you really need to compare the benefits of both approaches for yourself.
For me, I’m in the process of trying to transfer out of a defined benefit scheme, because I think managing it myself outweighs keeping the money under someone else’s control. I have personal reasons too, but I am confident of investing for myself.
If, like me, you want to transfer out of a defined benefit scheme, now might be the best time ever — before it’s too late.